The Central Bank of Nigeria (CBN) has ticked off nearly all items on its long-awaited monetary policy reform list, buying time for the government to chart a much-needed path to long-term and more sustainable dollar inflows.
The naira rallied to a three-month high of 1,251 per US dollar last Friday, a remarkable turnaround for a currency that was headed to 2,000/$ less than two months ago.
The resurgence, which has brought much-needed relief to households and businesses reeling from a cost-of-living crisis, was made possible after scarce dollars from foreign portfolio investors poured in on the back of the CBN’s reforms.
In addition to allowing the naira to trade more freely against the dollar, the apex bank under the leadership of Governor Olayemi Cardoso, who had promised to revert to orthodox monetary policy after his appointment last September, also raised interest rates by a combined record 600 basis points in its two meetings in February and March.
The CBN’s jumbo rate hike and a more credible exchange rate policy are proving too hard to resist for foreign investors. “They have put their money where their mouth is” was how one investor put it.
An estimated $1.5 billion has been invested in Nigeria’s Treasury Bills in the past month, with one rating agency expecting $5-10 billion of portfolio inflows over the course of 2024, analysts at Renaissance Capital Africa said in a note to clients last week. Total foreign portfolio investment flows this year at $3 billion is now well over the total of last year.
A shift in the international environment could however quickly lead to capital reversals that will leave the naira exposed yet again.
This unexpected shift could be a crisis in the United States that leads to tightening by the Federal Reserve, the equivalent of Nigeria’s central bank, or a deterioration in Nigeria’s perceived risk profile, leading to investors pulling out their money.
If that were to happen, currency analysts say the naira will come under severe pressure, given that foreign portfolio inflows account for roughly 80 percent of the new dollars into Nigeria.
“We will end up where we were a few weeks ago or even worse, as there is almost no more headroom for further tightening by the CBN,” a senior banker told BusinessDay.
“Indeed, even at these tightening levels, the CBN needs to watch bank balance sheets for credit and interest rate risks that may erode earnings and capital,” the banker said.
In his submission, the CBN needs dollars from the Nigerian National Petroleum Company Limited (NNPC) to boost its reserves and provide a more reliable source of funding for the market.
“What the CBN has done is to maximise the use of the instruments it controls and compensate for the failure of the oil sector to behave itself,” the banker said.
Cardoso therefore needs help from the government and Wale Edun, who doubles as coordinating minister of the economy and minister of finance.
Cardoso will be hoping the presidency and Edun take advantage of a short-window opened up by the CBN’s reforms to walk the talk of plans to boost oil and non-oil exports and raise dollars via asset sales.
The most important favour the presidency may have to do for the CBN is guaranteeing dollar inflows from the state-owned oil company, NNPC Ltd.
Whether it is oil theft or leakages or forward sales, subsidies or outright stealing, the rent seeking and extraction in the upstream sector will be the death of any policy if it is not checked, according to multiple sources with knowledge of Nigeria’s opaque oil and gas sector.
The CBN needs to make sure the federal government understands that the gains seen with the naira are not sustainable without more stable forex liquidity.
“The underlying causes of naira collapse were the twin curse of over supply of naira through ways and means the disappearance of dollar liquidity from NNPC,” a source familiar with the matter said.
“The CBN can only deal with the first and in the process attract hot money. The government must deal with the second and this is where vested interests remain a threat to all of us,” the source said.
“Even though in theory we have implemented the Petroleum Industry Act, nothing has changed. Same people. Business as usual,” another source said.
“The CBN must continue with this battle within the government. I am sure the Governor and the CME have started seeing the network of vested interests holding this nation by the jugular. They are extremely powerful and entrenched and they co-opt key members of any government in power,” the source added.
Cardoso will also be needing Edun’s help to fasttrack planned government assets sales.
It was through the sale of its land assets to the UAE that Egypt boosted investor confidence in its monetary reforms.
Egypt agreed in February to sell the development rights to a prime Mediterranean resort destination to Abu Dhabi for $24 billion, the same period it floated its currency and raised interest rates.
The results have been telling with the country receiving over $8 billion in inflows since then, helping the Egyptian pound to a rally.
The presidency also needs to come up with more long-term steps to raise the quality of local schools and health facilities to cut spending by Nigerians abroad, in order to ease the pressure on dollar demand.
There’s also a need for plans on how to loosen up the economy and bring in more private capital whether it is in the rail or power sector.
